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Put aside expenses and asset sales, a strong revenue base can ensure fiscal health for decades

PETER BEATTIE THE AUSTRALIAN MAY 03, 2014 12:00AM
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THE ugly reality facing the federal and Queensland governments as they prepare their 2014 budgets is the collapse in revenue growth.

It has made a significant contribution to our fiscal problems but no one has the guts to tackle it.

To fix the budget long-term, both governments have to fix the revenue base consistent with the economic and demographic realities of the next 20 years.

Queensland is a good case study. In my home state, the global ­financial crisis slashed mining royalties and cut stamp duty and land tax.

Low jobs growth also meant weak growth in payroll tax returns. The current low inflation savaged fiscal drag and revenues.

The only bright spot is the onset of my government’s liquefied natural gas strategy, which will deliver royalty revenue growth of 30 per cent in 2014-15 and 17 per cent in 2015-16.

Reaching a balanced budget is unlikely and shaky at best if revenue growth is not tackled. The Queensland government is too focused on cutting expenses to a level of obsession, blinding it to the revenue growth problem. This approach will damage the Queensland economy and the growth it needs to be chasing.

The state government is in danger of acting on its own political propaganda.

If it does, Queensland will be the loser. Its Commission of Audit, chaired by Peter Costello, highlighted the importance of revenue to fixing the current fiscal difficulties.

Unfortunately, it used ultra- cautious modelling to pump up its story to the point of being ridiculous, then ignored revenue in all but two of its 155 recommendations focusing on expenses and asset sales.

Adrian Noon, a smart former Queensland Treasury official, has pointed out the faulty analysis underlying the Costello report. It is constructed on highly conservative, unrealistic assumptions.

The Costello audit forecast revenue of between 1.7 per cent a year as its lower growth scenario and 2.5 per cent a year as its higher growth scenario.

This overcautious analysis was confirmed recently by the 2013-14 Queensland government’s mid-year fiscal and economic review where the four-year revenue growth for the general government sector is 28.1 per cent. Annualised, revenue averages 6.4 per cent a year; way above the ridiculous modelling in the Costello report.

The audit didn’t need to overcook the story with ultra conservative assumptions to under­stand there is a real fiscal problem. No one in the media has yet picked up on this fundamental difference between reality and Costello.

The government focus on expenditure is important but cuts to the public service, selling government offices and reducing expenditure in Queensland will only buy limited time in budgetary terms; perhaps three years.

Even raising $7 billion to $10bn from the proposed sale of assets such as the Townsville and Gladstone ports, the Mount Isa to Townsville railway line, government-owned generators at Stanwell and CS Energy and Sunwater’s industrial assets will only buy time.

To make matters worse, cutting sources of revenue and tax giveaways by the government are costing the budget more than $402 million this year, rising to more than $518m next year.

That money would help balance the budget and save public service jobs. Offering a tax holiday to the first consortium to get a mine going in the Galilee falls into the trap of giving away revenue before it starts.

The Costello audit acknow­ledged that my treasurer, Terry Mackenroth, delivered the three largest general government budget surpluses in Queensland history.

They were $3.3bn in 2003-04; $3.9bn in 2004-05 and $3.7bn in 2005-06. As a proportion of revenue, that was 13 per cent, 14 per cent and 12 per cent respectively. Mackenroth was Queensland’s best treasurer. Current Treasurer Tim Nicholls should have a chat with him.

Mackenroth understands revenue and expenses. Indeed, expenses have grown fairly slowly during the past 12 years. Real per capita expenses growth was only 0.75 per cent a year in the six years to 2006-07 and it was 2.3 per cent a year in the next six years. That higher growth was driven in part by the response to the global fin­ancial crisis.

Revenue grew by 65 per cent from $18.3bn in 2000-01 to $30.1bn in 2005-06 and expenses grew by only 38 per cent from $19.1bn in 2000-01 to $26.4bn in 2005-06.

When higher revenues came, money was put into long-running problem areas such as disability services, the health action plan and the extra year of prep school, and the infrastructure backlog in energy, the southeast Queensland plan and water.

There is no doubt the GFC belted Queensland and the state’s massive capital program should have been cut back when the GFC arrived.

I retired before the GFC in 2007; I would have slowed the program until the budget improved.

Now, with the slowing of the mining boom leaving an investment hole, the government has to tackle the revenue issue and growing the economy is the best way to grow the revenue base.

Costello barely recognises the great structural change in the Asian century, which is why our investment in LNG was a game changer.

Identifying and supporting the big opportunities like we did with coal-seam gas is what good government is about.

That is where the government’s focus should be.